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In what many see as a win for
appraisers, as well as those lenders and appraisal management companies
(AMCs) that do follow the law, Fifth Third Bank has agreed to pay nearly $85
million as part of a settlement with the U.S. Department of Justice (DOJ). The
case deals primarily with fraudulent appraisal practices. The lead
whistleblower in the case is George Mann, Fifth Third’s former chief
appraiser.
The settlement is the latest in a string of appraiser whistleblower lawsuits
that highlight unethical and fraudulent practices that violate appraiser
independence and perpetuate appraisal fraud. Mann follows in the footsteps of
Kyle Lagow, of Countrywide, who received $14 million in a whistleblower case
that led to a $1 billion settlement between Bank of America (BoA) and the
DOJ, and Robert Madsen, who received $56 million for his part in a $16.65
billion settlement, also with BoA (Interview: Appraiser Who Brought Down Countrywide).
Mann, and his co-claimant John Ferguson, will receive seven and one-half
percent (7.5%) for their part in the Fifth Third suit as whistleblowers,
which calculates to a tidy $6,368,326 before lawyers’ fees and taxes. The
lawsuit was filed under the qui
tam or whistleblower provisions of the False Claims Act, which
allows private parties to sue on behalf of the United States when they
believe a company has submitted false claims for government funds.
Mann declined to comment for this story. Mann’s initial complaint was filed
in June 2011, meaning that it took over four years to finally reach a
settlement. Throughout the struggle, Mann writes that he often listened to
Tom Petty’s song “I won’t back down,” advising appraisers to “give it a
listen anytime someone wants you to compromise your ethics.”

Fraud, Pressure and
Fees
Similar to other high-value whistleblower settlements, large portions of the
case have been sealed by the order of a federal judge. However, Mann’s
amended complaint remains public and contains many scenarios that will surely
sound familiar to appraisers.

Mann was hired in 2004 to be Chief Appraiser and Vice President of the Real
Estate Valuation Group (REVG), the valuation arm of Fifth Third Bank. His
tenure lasted until September 2008 when he was terminated.

While the initial suit focuses on commercial appraisals and commercial loans,
it also alleges that fraudulent and misleading appraisals were used by Fifth
Third to qualify for funding from the Troubled Asset Relief Fund (TARP), the
Federal Deposit Insurance Corporation (FDIC), Fannie Mae, Freddie Mac, and
other federal funding and securitization programs.

The practices described in the suit reflect the worst of the industry’s
abuses, echoing the same issues that appraisers continue to encounter and
speak out about today: pressure to meet value, unreasonable turn times and
low fees. According to the suit: “From 2004 through today, loan officers
instructed, coerced, and/or intimidated staff into obtaining appraisals at
below-market fees and with unrealistically short delivery times, which
resulted in questionable valuations. In addition, lenders used the same
methods of intimidation to pressure REVG staff and/or appraisers into raising
values so loan conditions could be met.”

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According to the suit, as part of its
scheme to commit appraisal fraud, Fifth Third also allowed loan personnel to
close loans prior to the completion of an appraisal, hand-selected favored
appraisers at times, and retaliated against impartial appraisers when they
would not value properties high enough.
Mann began reporting Fifth Third’s violations to the Federal Reserve in 2005
and continued sending reports until 2008 when he was terminated, according to
the suit. Mann and Ferguson estimated that the degree of overvaluation was at
least 20 percent of the Bank’s $20 billion commercial real estate loan
portfolio, causing Fifth Third’s loan portfolio to be overvalued by $4
billion.

This overvaluation, according to the suit, means that Fifth Third
misrepresented its financial position and consequently defrauded the Federal
Reserve, the United States Treasury, Fannie Mae, Freddie Mac, and the Federal
Housing Administration.

Federal Reserve
While most appraisers are familiar with the typical motivations that cause
pressure on an appraiser to “close the deal,” this suit offers a fresh look
at another reason banks are motivated to overvalue their collateral.
Specifically, the suit alleges that the misleading and overvalued appraisals
were used, in part, as a mechanism for reducing Fifth Third’s reserve
obligations for the Federal Reserve.

For instance, if a bank reports to the Federal Reserve that its loans are
well collateralized and of low risk, the Federal Reserve then allows the bank
to keep a lower amount on reserve. On the other hand, if a bank’s loans are
under-collateralized and the risk is high, the Federal Reserve requires the
bank to hold more money in reserve to protect the government’s interests.

Consequently, banks that want to reduce their reserve obligations and have
more cash on hand, have a motivation to actively over-report the value of
their loan portfolios, as this lowers the amount that the Federal Reserve
requires to be placed in reserve.

This, the suit alleges, is exactly what Fifth Third did, systematically
procuring “erroneous and inflated” values which caused the Federal Reserve to
underestimate the bank’s risk and allowed the bank to reduce its reserves.

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Case Development
Of interest to many who read this settlement closely is the fact that John
Ferguson was named as a co-claimant in the suit and received a portion of the
$6.34 million whistleblower settlement, despite the fact that Ferguson never
worked at Fifth Third Bank. Ferguson is a self-described “career
whistleblower” who initially filed a whistleblower lawsuit against Bank
United in the early 2000s. While his whistleblower lawsuit was not successful
due to Bank United declaring bankruptcy, Ferguson learned so much about the
process that he decided to become a fulltime whistleblower, helping others
build cases against big banks and other organizations that have defrauded the
government.

Ferguson says he brings experience to the process. “I call myself a
professional whistleblower. I help put all the bits of information together
so that it all fits in this kind of lawsuit. It’s a long and painful
process,” says Ferguson.

The case developed from a suit primarily focused on commercial appraisals,
and yet it culminated in a settlement over residential FHA loans. Ferguson
says one of the reasons for this may be the complexity of the commercial
loans and appraisals. “George and I have been the only whistleblowers who
filed on commercial lending. The government already understood the
residential side, but I don’t think they were as familiar with the commercial
side. It was a little disappointing because commercial real estate was hit
just as hard as residential,” says Ferguson.

Ultimately, the government decided to focus on residential lending,
discovering that hundreds of FHA loans were too defective to qualify for FHA
insurance. The $85 million settlement with Fifth Third compensates the
government for over 1,400 loans that were insured through the FHA loan
program and were discovered to be defective.

Being a Whistleblower
While the prospect of million dollar settlements sounds enticing to many, the
reality of being a whistleblower is not pretty. Whistleblowers frequently
speak of a long and lonely struggle for justice, including being forbidden
from discussing the suit with anyone, including immediate family or friends.

Ferguson says that being a whistleblower is not for everyone. “It’s hard to
sit there for four or five years sometimes, not knowing if you’re going to
get anything out of it or not. A whole host of negative things can happen to
a whistleblower, including getting blackballed by the industry,” says
Ferguson.

Document
For those appraisers who are aware of lenders or other organizations that are
brazenly violating the law and are interested in blowing the whistle,
Ferguson points out that success depends on documentation. “Your word is not
enough. The government has to have a lot of documentation before they will
get involved: people, places, and things. When did it happen, who did it, how
did it happen, why is it wrong, to what extent is it wrong, and what damages
might there be to the government? Appraisers witnessing wrongdoing would be
wise to save everything: appraisals, emails, phone numbers, you name it,”
says Ferguson.

The fact that Mann had such detailed and quality documentation on the fraud was
a critical element that helped the Fifth Third case succeed, according to
Ferguson.

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Lastly, Ferguson says appraisers who
are interested in blowing the whistle should consult with an attorney. “There
are a lot of whistleblower attorneys who will take your call if you believe
you have a case. You just need to know how to talk to them about it. I’d be
happy to talk to appraisers and lead them in the right direction, maybe point
them towards a lawyer,” says Ferguson.
Linda J. Stengle, one of the attorneys representing Mann and Ferguson,
encourages appraisers to step forward. "The False Claims Act, and to a
lesser extent, the SEC whistleblower program, can really help protect
qualified appraisers who are doing their jobs properly. Appraisers who are
aware of large scale USPAP and FHA violations, for example, should
investigate whether a whistleblower action will work for them."

Appraisers on
Frontline
Even inside the industry, appraisers are frequently blamed for going along
with the widespread fraud that contributed to the real estate bubble and
crash of the early 2000s. However, the Fifth Third settlement is a reminder
that appraisers have often been on the frontlines in the fight against real
estate and mortgage fraud. Like Kyle Lagow or George Mann, the rank-and-file
appraiser frequently stands alone against illegal pressure and is too often
the lone voice of integrity defending the public trust. Lately, appraisers
seem to be the ones blamed for the failures and fraud on the part of lenders
that led to the real estate collapse.

Richard Hagar, SRA trains lenders and AMCs on policies and procedures, as
well as helping residential appraisers understand their rights. Hagar
believes the settlement is good for the industry because it shows that there
are consequences when banks violate the law. “Appraisers are often bullied
and pushed around. The whistleblower statute, which was reinforced under
Dodd-Frank, gives appraisers some muscle to stand up to bullies,” says Hagar.

Hagar continues, “Appraisers have been on the frontlines of many of the
whistleblower lawsuits regarding real estate fraud that have been made
public, and I can tell you that multiple whistleblower cases involving
appraisers are currently ongoing. Appraisers don’t win every case and we
often only hear about the victorious ones since qui tam suits are filed under
seal. Even still, fighting back against these illegal practices is the only
way we can stop this,” Hagar said.

Here’s to those appraisers who refuse to compromise and “won’t back down.”

Standards Rule 2 relates to the
report itself (Standards Rule 1 relates to the development of the report). SR
2 states “In reporting the results of a real property appraisal, an appraiser
must communicate each analysis, opinion, and conclusion in a manner that is
not misleading.” The key word here is misleading.Must Not Be MisleadingStandards Rule 2-1:
Each written or oral real property appraisal must:
(a) “Clearly and accurately set forth the appraisal in a manner that will not
be misleading”;
(b) “Contain sufficient information to enable the intended users of the
appraisal to understand the report properly”; and
(c) “Clearly and accurately disclose all assumptions, extraordinary
assumptions, hypothetical conditions, and limiting conditions used in the assignment.”

Regarding SR 2-1 (a), this is one of the most important requirements of
USPAP, that the report will not be considered misleading. Just about all
lawsuits and state appraisal licensing board charges include this as a
“violation.” For those appraisers who prepare their appraisal on a Fannie Mae
appraisal report form, it would be a good idea to take advantage of the
Addendum page to explain your primary reasons for the selection of comparable
sales and to mention why any adjustment you made might cause a red light in
the minds of the review appraiser or client when they are looking over your
report. I always tell my appraisal students to prepare their appraisal report
as if they will have to defend it in court or before their state Board or to
a client or review appraiser who needs to understand your selection of
comparables and your rationale for coming to your conclusion of value.

Standards Rule 2-2
Standards Rule 2-2 (a) is the basis for every Appraisal Report’s content.
There is a list of 11 requirements in the Appraisal Report and one additional
requirement if there is a need for an extraordinary assumption and/or
hypothetical condition.

SR 2-2 (a) (i): “State the identity of the client, unless the client has
specifically requested otherwise, state the identity of any intended users by
name or type.” If the client’s name is confidential, then it has to be
disclosed in the work file. Only include other intended users permitted by
the client. It is also a good idea to state that “there are no other intended
users.”

SR 2-2 (a) (ii): “State the intended use of the appraisal.” Remember, the
intended use is not to determine the market value. That would be the type of
value as required by SR 2-2 (a) (v).

SR 2-2 (a) (iii): “Summarize information sufficiently to identify the real
estate involved in the appraisal, including the physical, legal, and economic
property characteristics relevant to the assignment.” You can provide the
address, legal description and a brief or detailed description of the subject
property.

SR 2-2 (a) (iv): “State the real property interest appraised.” Typically, but
not always, this would be either the fee simple interest, leased fee interest
or leasehold interest. For residential appraisers it is almost always the fee
simple interest but for commercial appraisers, it could be the fee simple
interest or the leased fee interest or the leasehold interest.

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SR 2-2 (a) (v): “State the type and
definition of value and cite the source of the definition.” Almost always you
are appraising the market value of the property. The Fannie Mae form gives
the market value definition but does not state the source of the definition.
SR 2-2 (a) (vi): “State the effective date of the appraisal and the date of
the report.” This is for the determination if you are valuing the property
for its current, retrospective (value in the past) or prospective (value in
the future) value. Only Fannie Mae can state at the bottom of the conclusion
of value that the date of the market value “is the date of inspection and the
effective date of this appraisal.” USPAP does not make this statement.

Typically, the date of your inspection (visit to the property) is your
effective date of value when preparing a current value. What happens if you
did not receive all pertinent information when you were at the subject
property and it takes a month or so for you to receive the information in
order for you to arrive at your value conclusion? Remember, the date of the
report is the date you send the report to your client. The effective date is
now one month or so earlier than the date of the report, yet you consider
your appraisal to be a current value. All you have to do is explain in your
report the reason for the lag time between the effective date and date of the
report. What should you do if a new sale closed prior to your effective date
but was not available when you did your research and shows up in the public
records just prior to the date of report? Good question!

SR 2-2 (a) (vii): “Summarize the scope of work used to develop the
appraisal.” Sufficient information includes disclosure of research and
analyses performed and might also include disclosure of research and analyses
not performed. While you determine the scope of work, your client should be
in agreement with it. (See Importance
of a Good Scope of Work)
SR 2-2 (a) (viii): “Summarize the information analyzed, the appraisal methods
and techniques employed, and the reasoning that supports the analyses,
opinions, and conclusion; exclusion of the sales comparison approach, cost
approach, or income approach must be explained.” You can prepare a paragraph
or two in your addendum indicating the approaches you used and why, and also
the approaches you did not use and why.

SR 2-2 (a) (ix): “State the use of the real estate existing as of the date of
value and the use of the real estate reflected in the appraisal.” This is
important when preparing a “prospective” value as the use of the real estate
as it exists as of the date of value might be just vacant land or the
improvements under construction. The use of the real estate reflected in the
appraisal would be the end product (such as a single family residence, etc.).
Therefore, a brief description of the subject property would be that the
existing use is vacant land or that the improvements are under construction.
This should be sufficient to satisfy this rule.

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SR 2-2 (a) (x): “When an opinion of highest and best use was developed by the
appraiser, summarize the support and rationale for that opinion.” This is
important. When checking the box “highest and best use as improved,” in your
Fannie Mae form, you now have to explain your support and rationale for that
opinion. Just stating the definition of highest and best use is not
sufficient. Give an explanation for all four tests to determine the highest
and best use. If you are doing a “prospective” market value, then you should also
determine the highest and best use “as vacant.” (See Highest
and Best Use Analysis).
SR 2-2 (a) (xi): “Clearly and conspicuously: state all extraordinary assumptions
and hypothetical conditions; and state that their use might have affected the
assignment results.” Don’t get confused between an extraordinary assumption
and a hypothetical
condition. An extraordinary assumption is an assumption, if found
to be false, could alter the appraiser’s opinions or conclusions. A
hypothetical condition is contrary to what is known to exist. For example,
when preparing a “retrospective” value, you would make the extraordinary
assumption that the condition of the property as of the date of inspection
(visit) is the same as of the date of value (unless you are told otherwise)
or if you were not able to look at all of the rooms (or rental spaces) that
the condition of those areas are similar to those areas that were looked at.
If you are preparing a “prospective” value, you would make the hypothetical
condition that the improvements have been completed (subject to completion of
plans and specifications).
SR 2-2 (a) (xii): Include a signed certification in accordance with Standards
Rule 2-3. Keep in mind that this section was revised in 2014 to include “The
name(s) of those providing the significant real property appraisal assistance
must be stated in the certification.” While the certification does not
require the appraiser to detail what work assistance was provided, somewhere
in the report you should list the work, such as “measuring the improvements,”
“researched for comparable sales,” “verifying the sales,” etc. This would
give support to the assistant in their number of hours they participated in
when preparing their appraisal log for certification.

Standards Rule 2-2 (b) applies to Restricted Appraisal Reports. It was
previously referred to as a Restricted Use Appraisal Report. The basic
difference between the Appraisal Report and the Restricted Appraisal Report
is stated in USPAP, page U-vi # 5: “An Appraisal Report must summarize the
appraiser’s analysis and the rationale for the conclusions. A Restricted
Appraisal Report might not include sufficient information for the client (no
other intended users are allowed) to understand either the appraiser’s
analyses or rationale for the appraiser’s conclusions.”

Mortgage applications down 3.5% on fewer rate swings

Wide weekly swings in mortgage applications seem to have calmed down, now that new lender regulations have been in place for nearly a month.

Total application volume decreased 3.5 percent on a seasonally adjusted basis for the week that ended Friday versus the previous week, according to the Mortgage Bankers Association.

"Between the recentTILA-RESPAregulatory change and the Columbus Day holiday, mortgage application volume has been more volatile than normal. However, that appears to be settling down somewhat," said Michael Fratantoni, chief economist for the MBA.

Getty Images

Refinance volume fell 4 percent for the week, seasonally adjusted, and applications to purchase a home fell 3 percent. Both purchase and refinance applications were running just below the year-to-date average levels last week, but purchase volume was 23 percent higher than the same week last year.

Mortgage rates have moved slightly higher, which would account for the drop in refinance volume. The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($417,000 or less) increased to 3.98 percent from 3.95 percent, with points increasing to 0.44 from 0.43 (including the origination fee) for 80 percent loan-to-value ratio loans.

The Federal Reserve is not expected to announce any change in interest rates following its two-day meeting Wednesday. Even when the Fed finally does make a move, it is entirely possible mortgage rates will not follow in step.

"It's really that broader, global economic trend that will do most to dictate longer-term rates like mortgages. After all, that's the entire reason rates are as low as they are despite the ever-increasing sense of the Fed's rate hike intentions," wrote Matthew Graham, chief operating officer ofMortgage News Daily.

The Federal Housing Finance Agency has delayed implementation of a key component of the Uniform Mortgage Data Program for the fourth time since the program was initiated three years ago, the agency announced Dec. 14.

Lenders and appraisers now have until July 23, 2012, to implement the UMDP’s Uniform Loan Delivery Dataset, according to the agency’s news release. ULDD implementation, previously scheduled to go into effect March 19, 2012, now allows for voluntary implementation April 23, 2012.

UMDP was designed to streamline loan and appraisal data collected by government-sponsored enterprises Fannie Mae and Freddie Mac.

The ULDD will replace the current 2,000-character flat files that Fannie and Freddie require from lenders and appraisers. Loan origination system vendors have been working to update processes and functionality to meet the new requirements for more than a year.

FHFA indicated that the revised ULDD deadline will not impact deadlines for the new Uniform Appraisal Dataset electronic data report and its associated delivery module, the Uniform Collateral Data Portal. Lenders and appraisers must submit appraisal reports in the new format for any loans sold on or after March 19 that have application dates on or after Dec. 1.

States that rely on judicial foreclosures are taking six months longer to clear delinquent loans than non-judicial states, according to the new Mortgage Monitor Report released Nov. 1 bydata and analytics firmLender Processing Services.

States that require judicial foreclosures are swamped with large inventories of problem homes that take 761 days to move from last payment to a foreclosure sale. Foreclosure sales in non-judicial states take roughly 580 days.LPS’ findings reflect activity through the end of September.

The rate of new problem loans increased sharply over the last two months, with 1.6 percent of loans that were current six months ago now 60 or more days delinquent or in foreclosure. Foreclosure timelines continued to increase across the board — almost 72 percent of loans in foreclosure have not received a payment in a year or more.

Seventy percent of the top 10 states with the highest percentage of foreclosures are judicial foreclosure states and accounted for nearly 7 percent of the entire active loan count.

Banks may soon take another blow if the Federal Housing Administration were to start denying banks’ insurance claims for money they lost in home foreclosures, Reuters reported Oct. 3. The FHA is under political and finance pressure to deny claims, which could cost banks $13.5 billion in mortgage-related losses.

At issue is the FHA’s resolve to deny claims from banks that have made mistakes in foreclosure processing or in lending processes. FHA also could seek punitive damages from banks by alleging that lenders made false claims for reimbursement of losses on foreclosures.

Currently, FHA insures about 10 percent of all mortgages.

Banks already are facing pressures from claims by government-sponsored enterprises Fannie Mae and Freddie Mac and from private investors. Reuters reported that if FHA were to deny claims, banks probably would further tighten lending standards, which would exacerbate an already troubled housing market.

A Sept. 27 report from the inspector general for the Federal Housing Finance Agency accused Freddie Mac of missing opportunities to recover billions in claims over defaulted mortgages, and suggested that a $1.3 billion settlement with Bank of America over bad-loan claims was inadequate, The Wall Street Journal reported.

In its report, the inspector general suggested that Freddie hadn't been aggressive enough in reviewing loans and alleged that the government-sponsored enterprise had been lax in order to preserve business relationships with top customers like Bank of America.

The FDIC is now contending that independent contractor appraisers are the legal agents of appraisal management companies (AMCs) in both of its cases against LSI Appraisal and CoreLogic. Based on this contention, the FDIC asserts that the AMCs should be liable for all damages attributable to the alleged negligence of their panel appraisers. The FDIC first asserted this argument in a brief filed in its case against Lender Processing Services and its AMC LSI Appraisal (see the update on that case here). It is now making the same argument in its case against CoreLogic, parent of the AMC formerly known as eAppraiseIT. In sum, the FDIC's contention is that an AMC "is vicariously 'responsible and liable' for the torts committed by the individual appraisers it retain[s] as a matter of black letter principal/agency law." While this is just one of many claims by the FDIC against the AMCs, this issue would have the most wide-ranging impact on the appraisal industry, if the FDIC prevails on it.